Undaunted that legislators killed a bill requiring that lenders prove their right to foreclose on a home, backers of the failed proposal have filed it as a ballot initiative with a harder approach: Foreclosures can’t happen unless all loan papers are properly recorded with the county first.

That means anytime a lender sells or transfers a note, as has been the practice for several years in the mortgage-backed securities business, the holder must file it with the county recorder of deeds.

Colorado has not required assignments — the legal word for when a mortgage or note exchanges hands — to be recorded for years, a critical part of the problem in determining who actually owns a note during a foreclosure, proponents of the initiative say.

“The intent is to ensure there are no gaps in the line of title,” attorney Stephen Brunette said. “Title records now are being totally messed with. Colorado’s foreclosure process today is fundamentally unsound.”

The ballot initiative — called the Foreclosure Due Process and Fraud Prevention Initiative — squarely takes on Colorado law that uniquely allows for “no-doc” foreclosures, where lenders can take a home without ever having to prove they have that right.

“In other states, courts are scrutinizing whether the foreclosing party has the right to foreclose and concluding that in most cases (they haven’t) demonstrated that right with proper documentation,” said Debra Fortenberry, a Colorado Springs attorney who helped draft the initiative with Brunette and the Colorado Progressive Coalition.

“In Colorado, there is nothing to scrutinize,” she said.

No other state allows for a foreclosure without the lender first proving it is the right entity to do so. Colorado allows foreclosure lawyers to sign a “statement of qualified holder,” which basically says they think their client owns the note or mortgage without ever actually seeing it — a practice some states have labeled as “robo-signing.”

Colorado law allows a foreclosure to continue even if the lawyer gets it wrong — and doesn’t hold anyone accountable for the mistake. It’s a crime in Nevada, one of the states to use deeds of trust like Colorado.

Initiative hearing set

Opponents of House Bill 1156 who helped kill it in a Republican-controlled committee March 13 said the initiative could push lenders from the market.

“Our one concern is that nothing hurt lending in Colorado,” said Don Childears, president of the Colorado Bankers Association. “We’re not jumping to a conclusion that it’s automatically bad and have organizations against it tomorrow. But we’re aggressively thinking through its impact.”

HB 1156 sought to have lenders provide proof — theoretically a certified copy of a mortgage or loan note — that they had the right to foreclose on a property. It also would have required a judge to review the paperwork and certify a lender’s standing before ordering the public auction of a foreclosed home.

The proposed initiative is scheduled for a hearing at the Legislative Council on April 6, the first step to reaching November’s ballot. The proposal would need more than 87,100 validated signatures to get on the ballot, according to the Colorado secretary of state’s office.

“Foreclosure is the only civil proceeding in Colorado where no disclosures are required,” Brunette said. “Even in small-claims court, you have to produce the evidence so you can sue, but to take a home, they don’t have to produce a thing.”

Tracking ownership

Mortgages were bought and sold so often in what became toxic mortgage-backed securities that it became difficult — and costly — to file each of the resulting transfers with a county.

Colorado does not require every ownership transfer of a mortgage to be recorded, but other states do.

Thousands of homeowners facing foreclosure — even those who simply wanted to refinance as interest rates tumbled — have recounted experiences of simply trying to determine who owned their mortgage.

The initiative nearly replicates a similar law recently passed in Nevada, which requires that all mortgage loan documents and their transfers be recorded. If not, the lender is not allowed to foreclose.

“If lenders have their stuff in a row, all their documents properly filed like they used to do it, there will absolutely be no problem,” Brunette said. “This solves the problems.”

Ballot proposal

This is the text of the foreclosure initiative filed with the Colorado secretary of state’s office. Once a legislative measure, the plan was killed in committee:

No person shall be deprived of real property through a foreclosure unless the party claiming the right to foreclose files in the foreclosure proceeding competent evidence of its right to enforce a valid security interest, recorded before the foreclosure is commenced, with the clerk and recorder of the county in which the real property is located, in accord with Article XIV, Section 8 of this Constitution. Competent evidence shall include (1) the evidence of debt; (2) endorsements, assignments, or transfers, if any, of the evidence of debt to the foreclosing party; and (3) duly recorded assignments, if any, of the recorded security interest to the foreclosing party. Any statutes inconsistent with this Article II, Section 25(a) are repealed on the effective date of this Section.

David is a member of the Investigations Team and has been at The Denver Post since 1999. He was a founding member of the team before moving on to cover banking, finance, human services, consumer affairs, and business investigations. He has also worked at newspapers in New York, St. Louis and Detroit over a 35-year career.

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